Cap and Trade: Will it work?

It seems unlikely, from a variety of points of view. Greenpeace is opposed, as are most trade groups. It's yet another effort to get around a direct tax by coming up with a system for taxing without calling it a tax. It will result in job losses; the question is, how many, and how soon. The Brookings Institution estimates a 0.5 bump in unemployment.

As E. Thomas McClanahan writes in the Kansas City Star:

How do you end up with a vibrant economy and lots of net job creation by forcing people to pay higher energy prices? Well, you don’t, and that’s why this measure is one of the biggest threats to the U.S. economy ever to emerge on Capitol Hill. ...

The whole purpose of the bill is to force people to pay more for energy. That won’t spur economic growth. It will retard it, by slowing the growth of consumer spending, which makes up the greatest share of the gross domestic product. The result will be lower output and fewer jobs.

The notion that cap-and-trade will do little harm came from a recent Congressional Budget Office analysis that pegged the bill’s annual cost in 2020 at a mere $175 for the average family. (Lower-income households would get a rebate reducing their energy costs by $40.)

The Heritage Foundation pointed out that incredibly the CBO study failed to include in its calculations the overall effect on economic growth. The bill would not only make energy prices go up, but — because energy costs raise production costs generally — it would make the prices of almost everything else rise as well.

Earlier this year, Pres. Obama said that transitioning to a green economy would mean real economic pain -- he was right (and deserves credit for being honest then, at least). Now the message from Democrats is that somehow, magically, jobs will be created by higher energy prices and, er, lost jobs in the traditional energy fields. But they're apparently not as confident as all that; the Waxman-Markey (aka ACES) bill contains provisions to compensate workers laid off by the economic pressures the new system will undoubtedly produce.

The European Union's system, the Emissions Trading Scheme, has had mixed results, to put it mildly. Investors Business Daily reported that the system has major flaws, including perverse incentives not to upgrade to environmentally friendly technologies. Even environmental groups have given the ETS a collective thumbs down, according to IBD:

Begun in 2005, the EU's Emissions Trading Scheme has raised energy prices with "uncertain" effects on greenhouse gas emissions, according to numerous studies.

Even green groups have been critical. The Natural Resources Defense Council, for example, has called ETS "an example of what not to do."

This failure has not daunted fans of Congress' cap-and-trade bill. They claim to have learned from the earlier mistakes.

In a recent Washington Post op-ed, Harvard Prof. Martin Feldstein argued that any unilateral (i.e., without anything compelling China and India to tighten environmental clamps) move toward cap-and-trade in the U.S. would raises costs without delivering any significant environmental benefit:

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction -- slightly less than the Waxman-Markey target -- would raise the cost of living of a typical household by $1,600 a year. Some expert studies estimate that the cost to households could be substantially higher. The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2.

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable. The U.S. should wait until there is a global agreement on CO2 that includes China and India before committing to costly reductions in the United States.

Remember who pushed this scheme to start with in the U.S. Not Congress -- Enron -- and there is a reason they were hot to set this market up, as US News & World Report's William O'Keefe pointed out:

The cap-and-trade system being touted on Capitol Hill would create a multibillion-dollar playground that would, once again, create a group of wealthy traders benefiting at the expense of millions of average families—middle to low-income households that would end up paying more for food, energy, and almost everything else they buy.

Enron executives—before their well-deserved fall—did little to conceal their lust for cap-and-trade. In 2002, the Washington Post reported that "an internal Enron memo said the Kyoto agreement, if implemented, would do more to promote Enron's business than almost any other regulatory initiative outside of restructuring the energy and natural gas industries in Europe and the United States."

Promoting the bottom lines of opportunists is not the job of policymakers. Assisting the staggering 2.6 million American workers who lost their jobs in just the last four months should be. With our nation struggling through the worst economic crisis in over 70 years, Congress shouldn't risk further economic damage by pushing a risky carbon emission mitigation scheme. There are far better alternatives for dealing with climate change.

Do we really want to go down this road? Apparently so.